Question

Railroad companies controlled by J. P. Morgan sometimes issued watered stock, a practice that Question 11 options: a) kept investors happy but caused overcapitalization and debt for the railroads. b) was highly speculative and forced the railroads into bankruptcy. c) offered large investors first refusal when a company issued additional stock. d) kept the railroad companies from bankruptcy.

Answer 1

A) kept investors happy but caused overcapitalization and debt for the railroads.

Step-by-step explanation:

When a firm issued watered stock, it means that they are issuing the stock with an artificially high par value. Watered stocks were a type of fraud related to the sales of stocks with an absurd par value. You have to remember that back then, railroad companies were huge and extremely powerful, monopolies were common and information was scarce and generally manipulated. By issuing stocks with a very high par value investors were tricked into believing that the company was actually worth much more that its real value. Very few people dared to oppose the industry giants and most tried to earn money by using the same dirty tricks.